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Saturday, January 29, 2011

BSE Sensex and NSE Nifty 50 Index Chart Patterns – Jan 28, ‘11

In a post on Jan 18 ‘11, I had mentioned that the zone between the Apr ‘10 and Aug ‘10 tops should provide strong support. It wasn’t crystal-ball gazing. Previous tops tend to provide support. Both indices stopped exactly in the middle of their support zones. Will the support hold? The sheer volume of FII selling gives that a low probability.

BSE Sensex Index Chart

In last week’s analysis, the weakness in the technical indicators led me to comment that the correction wasn’t over and only a mild pullback rally could be expected. The pullback halted at the falling 20 day EMA. The subsequent correction has dropped the Sensex below the 200 day EMA and rung the first warning bell of trend-change possibilities.

The technical indicators are hinting that the correction may continue. The MACD is falling below its signal line into deeper negative territory. The ROC remains negative, moving up to the ‘0’ line but reversing directions towards its 10 day MA. Both the RSI and and slow stochastic are in their oversold zones.

How low can the Sensex go? Market sentiments don’t care much for arithmetic, but here are some technical support levels:

The next zone of support is between 17500 (Oct ‘09 top) and 17800 (Jan ‘10 top)

A 20% drop from the Nov ‘10 top will take the Sensex to 16900

A 38.2% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10 is at 16150

A 50% Fibonacci retracement level of the bull rally is at 14600

Can the Sensex go even lower? Nothing can be ruled out when the bears go on a rampage, but it seems highly unlikely at this stage. Any drop below 17000 should provide good buying opportunities.

NSE Nifty 50 Index Chart

The drops below the 200 day EMA on Thu. Jan 27 ‘11 and into the support zone on Fri. Jan 28 ‘11 were accompanied by an increase in volumes, which doesn’t augur well for the bulls. Looks like the market wants to go lower – or, rather the FIIs would like to see lower levels. The technical indicators are not indicating any halt to the correction yet.

In case the support zone between 5400 and 5550 gets breached, the next support levels of the Nifty 50 can be:

the zone between 5200 (Oct ‘09 top) and 5300 (Jan ‘10 top)

at 5050, which is a 20% drop from the Nov ‘10 top

at 4900, which is the 38.2% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10

at 4450, which is the 50% Fibonacci retracement level of the bull rally from Mar ‘09 to Nov ‘10

In technical analysis, we don’t deal with exact numbers, so the levels indicated have been rounded-off to the nearest 50. Remember that breach of any level is subject to a 3% ‘whipsaw’ lee-way.

It is not expected that the Nifty will fall too far below 5000. There is neither euphoria nor panic among investors. Q3 results declared so far have shown good growth in top and bottom lines of India, Inc. The companies that have fared poorly are getting hammered. The RBI is monitoring the economy well and there doesn’t seem to be any asset bubbles. Reforms are moving in fits and starts, but the track record of the Congress-led UPA has never been exemplary about taking bold decisions.

Now that food inflation has become a major problem, there is sudden talk of allowing MNCs to enter organised retail. That one single move can not only bring down food prices through better procurement, storage and distribution but also provide thousands of jobs to semi-literate youths. One can only hope that the Finance Minister takes this important step in the forthcoming budget.

Bottomline? The chart patterns of the BSE Sensex and NSE Nifty 50 indices have formed bearish patterns of lower tops and lower bottoms. Jan 2010 was also a down month, but it helped buyers to enter at lower valuations. So look at this correction as an opportunity to accumulate blue-chip stocks. The correction hasn’t played out yet; avoid aggressive buying.

4 comments:

I have been a fan of your blog and following it for a long time. Your analysis of the correction happening right now is also excellent. However there is one point I want to strongly disagree on. That of accumulating blue-chip stocks now on falls. I somehow feel the game has not even started for the bears. Please do have a look at the break of 200 DMAs of all the major leading companies that comprise the main indices and crossover 50DMA below the 200DMA in most of them. And all of this after a double top on the indices over a period of 3 years. This clearly indicates that the market has become a sell on rallies and NO buy on dips. It would be very prudent to be in cash for next 1-1.5 years and not expect much from equities as technicals are clearly indicating lot of pain in the interim. Many thanks as always for your insightful updates.

I agree with all what has been said and thanks for alerting.volatility is such that you can trade,so why not give comprehensive trading strategics,these will change our mind set for the events and times

Investing in fundamentally strong stocks,you always get lot of oppurtunities in bull market as well as bear market.You have to identify an undervalued or stock with hidden value to invest and wait for growth.

It is good to have a strong opposing view - because that leads to discussion and learning. One needs to suppress one's feelings and look at the reality.

Any break below the 200 day EMA should be treated as a warning sign, but not a trend change. You may want to read my blog post of Jan 18 '11 to find out how to distinguish between a bull market correction, and a bear market.

The 'death cross' of the 50 day EMA below the 200 day EMA has happened in only 12 out of the 30 Sensex stocks so far. That is why it hasn't happened on the Sensex chart - as yet. We will need to keep a close watch on the unfolding events - particularly a 'black swan' in the Middle East.

A double-top isn't confirmed merely by a retreat from a previous top. The 'valley' between the two 'peaks' needs to be breached. In the Sensex, that would mean a breach of 7700. While such a possibility can not be ruled out, the probability is quite low at this point in time.

On the long-term charts, the MACD, RSI and slow stochastic made higher tops in Nov '10 than they did in Jan '08. The combined positive divergences indicate that the Sensex will make a new high sooner than later.

If you want to be a successful stock investor, it is never prudent to be in cash. That is trying to time the market, which is almost an impossible task. You need to follow an asset allocation plan, and let the market help you to decide when you need to reallocate your assets.

@kuchroog: Appreciate your comments.

I have never indulged in short-term trading, nor do I encourage others to do so. The odds of winning are better in a casino or race track - as per investment guru Peter Lynch.